Apple's Rumored iWatch And Why It Matters

There is widespread speculation that Apple will introduce its own watch this year. The implications are substantial in terms of what the watch could be and what it could mean for Apple’s financials and stock price. The company has not announced anything regarding a new product; therefore, at this point, all discussions about the iWatch and its features are pure speculation. However, in the past, speculation regarding new Apple products has been more accurate than inaccurate so it warrants reviewing and assessing the implications.

Apple is reported to have over 75 patents on wearable technology. Some speculate that the iWatch will be a flexible glass “snap bracelet” and Corning is reported to have developed the flexible glass technology. It seems like this technology will not be available for mass production for a couple years yet, so the first generation iWatch may look more like a souped-up iPod Nano or a slimmed-down screen iPhone on a strap than a snap bracelet.

The Apple iWatch could take “hands free” to a new level of convenience. The iWatch is assumed to be linked to an iPhone or an iPad with Bluetooth technology, enabling a user to be alerted to incoming calls, texts, emails and information…in a nonchalant, unobtrusive manner. A user could be alerted to important communication through vibration and casually check the screen, for example. Additional alerts could include caller ID, calendar, weather, stock prices, and vital signs. Presumably, users could customize the iWatch to display or alert on a limited number of items they care most about, because the iPhone or iPad would be close by with the full offering.

Apple had previously committed to using NFC chips in upcoming devices, and an iWatch could be the ideal medium for mobile payments. Rather than carrying a wallet, users could wave their wrists and pay for coffee at Starbucks (now, even, without a NFC chip) or use their iWatch as a credit card. Again, presumably, the iWatch would be loaded with all the features of Passbook, and could serve as convenient hands-free access to boarding passes, frequent shopper fobs, retail couponing, etc. With GPS and location-based e-commerce services, retailers could send a quick coupon alert to the iWatch when a user passes through the store. This is not any different than what could transpire with an iPhone and Passbook, but the difference is greater visibility and chance that a user will see it on an iWatch…and then pay for the item with the iWatch.

The speculation becomes exciting around the concept of Biometrics embedded in the iWatch. As such, the iWatch becomes very secure and could have more applications such as secured-building entry, secure computer or device access, or even secure car or home entry. The Biometrics assure the iWatch wearer is the authenticated user and provides an additional layer of authentication, which could be very important across the board from enterprise to personal security.

Why does this matter? Apple won’t be the first with a smartwatch. Pebble, Sony and Nike have already introduced smartwatches and Samsung has announced its intentions to bring a smartwatch to market. The Pebble received great fanfare at CES and was noted by many technology columnists as one of the new and upcoming products to keep eyes on. The watch is compatible with both Apple iOS and Google Android apps, provides alerts, and is highly customizable what a user wants to see on or be alerted to on his/her watch. The Pebble watch will start shipping in April or May, and will cost $150. Sony’s SmartWatch, retailing for $149, is compatible with some Android smartphones, can alert, play music and enable the user to talk on his/her linked smartphone. This smartphone has received mixed reviews. The Nike + Fuelband uses an accelerometer to track daily activity and calories burned. It is particularly attractive for sports enthusiasts and athletes who want to track their performance. The Nike + FuelBand connects with an iPhone or iPod Touch, but does not have any plans to develop for Android.

Not being first hasn't hurt Apple's ability to mass popularize new products. So, while Apple would not be the first, it could be the first to make it at the top of “must-have” list for the general public. Apple has done this historically by integrating more functionality, integrating into its Apple Ecosystem and leveraging its ability to market new products. If (when) Apple introduces its iWatch, it will be very important for three reasons.

First, it will be the first new product category since Steve Jobs passed away. Steve was the genius behind product introductions and the iWatch will be a test to see if Apple can “do it again” without Steve. Each of Apple’s new product categories from the iPod to the iPhone to the iPad has been even more successful that the previous in terms of the pace of consumer adoption and the size of consumer demand out of the gate. The iWatch has the potential to be bigger than any before it, particularly if the price point is lower than an iPhone or iPod. The issue for Apple will be if they can introduce this potentially new and revolutionary product as well (or close to it) as Steve Jobs did for the previous three categories.

Second, the successful introduction of the iWatch has the power to negate the current pressure onApple’s stock. Over the last six months, Apple’s stock has fallen 35% because investors believe that Apple can’t innovate any more and that Apple will continue to lose against Samsung/Google’s competitive threat. Back in September, Apple traded at what then seemed like unbelievably low multiples of 10.5x forward earnings (less cash). Today, Apple trades at 7.2x lowered forward earnings (less cash), or at a discount of more than 30%. A successful launch rejuvenates the psychology and therefore multiple on Apple stock.

Third, the iWatch could add 10% to Apple’s earnings after eight quarters from introduction. This estimate is based upon a product unit ramp similar to the iPad (although each successive product introduction has yielded faster adoption), at a unit price of $300 and at current margins (approximately 40% gross, 25% net). Since the iWatch is assumed to be less expensive than the iPad, the ramp could be faster and the impact could come earlier.

Lastly, the iWatch has the potential to add significantly to Apple’s market capitalization. Obviously, this point is a summary of the previous two, but it is also based on historical data. Product launches lift Apple’s market capitalization. The quarter before the iPhone was released, Apple’s market capitalization was $80B. Four full quarters after the iPhone was released, Apple’s market capitalization was $147B, an increase of 84%. Similarly, in the full quarter before the iPad was released, Apple’s market capitalization was $213B. Four full quarters later, Apple’s market capitalization was $310, up 46%. With the release of an iWatch, Apple has the potential to at least regain previous highs.

The iWatch matters. For Apple, it is more than a product launch, it is the opportunity to put the shine back on the stock and the company, and give investors confidence that Apple can innovate, market and set the standards for what consumers “must have.” For investors, it represents a tangible catalyst for Apple's stock.

Currently, Founder & CEO of myFrontdoor.com. Previously, I've been involved in technology since 1993 as an investment banker and research analyst and met with hundreds of companies, from start-ups to the large cap companies. I have been contributing to Forbes.com since...